Tourism sector has some stocks standing

There is probably no sector more touched by the string of natural disasters in the region this year than tourism, and Cairns-based
Reef Casino Trust
is one of the most affected by the devastation, which has struck just as the gaming industry faces regulatory scrutiny.

The trust appears to have walked into a perfect storm; the world’s most expensive natural disaster rocking Japan likely to curtail the number of tourists from that country, while the flooding and cyclones that hit Queensland should weigh on local tourism.

Japanese tourists are as important to the Queensland economy as they are to Hawaii. Bloomberg has reported that some Hawaiian hotels may struggle to repay loans as a consequence of the earthquake.

Select Equities analyst Danny Goldberg estimated that 25 per cent of visitors to the Reef Hotel Casino complex owned by the trust were international tourists, the vast majority of them coming from Japan. About half of Reef Hotel’s visitors were locals and the rest were interstate visitors.

“Japan is very important to Cairns but the number of inbound Japanese tourists have been falling for a number of years due to the high Australian dollar," Mr Goldberg said.

That may have protected the shareprice from suffering a bigger shock as the stock didn’t react much to news of the earthquake and tsunami in that country.

This is because investors have very low expectations for the trust and sent the stock crashing to a more-than seven-year low of $1.60 on January 25.

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Natural disasters aside, the Queensland government had doubled its electronic gaming machine tax rate to 20 per cent and the federal government is under intense pressure to introduce tighter regulation on pokie machines.

But the bad news is already in the price, according to Mr Goldberg who has a “hold" rating on the stock given its relatively low 2011-12 forecast price-earnings of 9.2 times and yield of over 11 per cent, including a special dividend.

The stock added 2¢ this morning to $1.80. Select Equities does not publish price targets.

Flight Centre (FLT)

Flight Centre
is also trying to reassure investors that it is weathering the turbulence by sticking to its earnings guidance this morning.

Management said it is on track to post a record pre-tax result of between $220 million and $240 million for the year ending June 30, which is a 10 per cent to 20 per cent increase over the previous year.

Flight Centre’s local operations are performing well, the strong Australian dollar and reasonably priced airfares encouraging locals to holiday overseas, while corporate travel is tracking “well above" last year.

Its overseas businesses in Britain and the US are also showing signs of strength, although management warned that if the US did not deliver a solid June quarter, it might have to write down good will.

Eight of its shops in Christchurch are not expected to reopen after the city’s earthquake but the New Zealand operation is still generating good profits.

The upbeat update wasn’t quite enough to lift the stock with Flight Centre easing 7¢ to $22.55 this morning, although the stock has run hard in the past 3½ weeks, gaining about 9 per cent.

But the stock could rally higher in the short term as it is trading on a reasonable one-year forward price-earnings ratio of 12.7 times and is below the average broker price target of $25.02 a share.

Jetset Travelworld (JET)

Investors looking for more upside might prefer
Jetset Travelworld
.

The stock has lagged most of its peers and the S&P/ASX 300 Consumer Discretionary Index, posting a loss of 11.5 per cent over the past year as investors grew wary about its ability to achieve synergies with its merger with Stella Travel.

RBS Morgans noted that the combination of the businesses has created a vertically integrated travel company that provides retail, ticketing, wholesale, travel management and online services with total transaction value of $5.5 billion – about half that of its much larger rival Flight Centre, which has more than six times the market capitalisation of Jetset.

Jetset has estimated it would save $10 million before tax at the end of 2011-12 due to the merger, but RBS suspects that forecast is too conservative.

However, Jetset’s 2010-11 profit result is likely to be messy given the merger was completed in September and one-off costs associated with the deal.

But 2011-12 should show a strong increase in profitability and RBS is urging investors to buy the stock, which is trading on a price-earnings ratio of about 10 times.

The stock was trading flat this morning at 81¢. RBS has a price target of $1.15 a share.